-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DL8zXObDwg4N/wBBPkMRTbac4oH6KcxefCyy50KnSOUwux5uWZNPV4D9b8zJ2scO H20gvjZ0agxtyu8yAQzw0A== 0000950123-02-006948.txt : 20020712 0000950123-02-006948.hdr.sgml : 20020712 20020712164131 ACCESSION NUMBER: 0000950123-02-006948 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020712 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020712 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEAM HEALTH INC CENTRAL INDEX KEY: 0001086795 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 621562558 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-80337 FILM NUMBER: 02702133 BUSINESS ADDRESS: STREET 1: 1900 WINSTON RD CITY: KNOXVILLE STATE: TN ZIP: 37919 BUSINESS PHONE: 8003422898 MAIL ADDRESS: STREET 1: 1900 WINSTON RD CITY: KNOXVILLE STATE: TN ZIP: 37919 8-K/A 1 y62245e8vkza.txt TEAM HEALTH, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report: July 12, 2002 TEAM HEALTH, INC. (Exact name of registrant as specified in its charter) TENNESSEE 333-80337 62-1562558 (State or other jurisdiction (Commission (IRS Employer of incorporation File Number) Identification No.) 1900 WINSTON ROAD, KNOXVILLE, TN 37919 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (865) 693-1000 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS Team Health hereby amends its Current Report on Form 8-K, dated May 15, 2002, relating to the acquisition of Spectrum Healthcare Resources ("SHR") on May 1, 2002. Team Health is filing this amendment for the purpose of including the required financial statements and pro forma financial information with respect to SHR in accordance with the requirements of Form 8-K. (a) Financial Statements of Business Acquired The required audited financial statements of SHR as of and for the three years ended September 30, 2001, are filed herewith. The required unaudited condensed financial statements of SHR as of and for the six months ended March 31, 2002, are filed herewith. (b) Pro Forma Financial Information. The required pro forma financial statements of Team Health, giving effect to the acquisition of SHR as if it had occurred on March 31, 2002, as to the balance sheet and on January 1, 2002 and 2001, as to the statements of operations, are filed herewith. (c) Exhibits: 10.18 Stock Purchase Agreement, dated March 29, 2002, between Team Health, Inc., Spectrum Healthcare Services, Inc., the Beneficial Owners of Spectrum Healthcare Services, Inc. and Madison Dearborn Capital Partners, L.P. is incorporated by reference to Team Health's Current Report on Form 8-K filed May 15, 2002, Commission File No. 333-80337. 99.1 Copy of the press release, dated May 1, 2002, relating to the completion of the acquisition of SHR is incorporated by reference to Team Health's Current Report on Form 8-K filed May 15, 2002, Commission File No. 333-80337. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TEAM HEALTH, INC. (Registrant) /s/ David P. Jones ------------------------------------ David P. Jones Vice President and Treasurer Date: July 12, 2002 INDEX TO FINANCIAL STATEMENTS
SPECTRUM HEALTHCARE RESOURCES PAGE Report of Independent Auditors ......................................................... 1 Combined Balance Sheets as of September 30, 2001 and 2000 .............................. 2 Combined Statements of Operations for the three years ended September 30, 2001 ......... 3 Combined Statements of Changes in Owner's Net Investment for the three years ended September 30, 2001 .................................................................. 4 Combined Statements of Cash Flows for the three years ended September 30, 2001 ......... 5 Notes to Combined Financial Statements ................................................. 6 Combined Balance Sheet as of March 31, 2002 (Unaudited) ................................ 14 Combined Statements of Operations for the six months ended March 31, 2002 and 2001 (Unaudited) ......................................................................... 15 Combined Statements of Cash Flows for the six months ended March 31, 2002 and 2001 (Unaudited) ......................................................................... 16 Notes to Combined Financial Statements (Unaudited) ..................................... 17 TEAM HEALTH, INC ....................................................................... Pro Forma Consolidated Balance Sheet as of March 31, 2002 (Unaudited) .................. 20 Pro Forma Consolidated Statement of Operations for the three months ended March 31, 2002 (Unaudited) ......................................................................... 21 Pro Forma Consolidated Statement of Operations for the year ended December 31, 2001 (Unaudited) ......................................................................... 22 Notes to Pro Forma Consolidated Financial Statements (Unaudited) ....................... 23
REPORT OF INDEPENDENT AUDITORS The Board of Directors Spectrum Healthcare Services We have audited the accompanying combined balance sheets as of September 30, 2001 and 2000, of the corporations listed in Note 1 and the related combined statements of operations, changes in owner's net investment, and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the corporations listed in Note 1 at September 30, 2001 and 2000, and the combined results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP St. Louis, Missouri April 19, 2002 1 SPECTRUM HEALTHCARE RESOURCES COMBINED BALANCE SHEETS (In Thousands, Except Share and per Share Data)
SEPTEMBER 30, 2001 2000 -------- -------- ASSETS Current assets: Trade receivables, less allowance for doubtful accounts ($2,935 and $2,760 in 2001 and 2000, respectively) $ 18,436 $ 22,524 Inventories and other current assets 552 53 Deferred income taxes 1,625 1,831 -------- -------- Total current assets 20,613 24,408 Property and equipment: Buildings and improvements 250 252 Furniture, equipment, and fixtures 735 506 -------- -------- 985 758 Less accumulated depreciation 668 536 -------- -------- Total property and equipment, net 317 222 Deferred income taxes 1,387 1,053 Other 1,426 1,203 -------- -------- Total assets $ 23,743 $ 26,886 ======== ======== LIABILITIES AND OWNER'S INVESTMENT Current liabilities: Accounts payable $ 904 $ 483 Accrued payroll and related expenses 4,885 4,247 Accrued insurance 1,196 1,539 Other accrued expenses 6,831 4,384 -------- -------- Total current liabilities 13,816 10,653 Professional liability claim reserves 2,127 1,417 Other noncurrent liabilities 947 937 -------- -------- Total noncurrent liabilities 3,074 2,354 Owner's net investment: Common stock, par value $1.00 per share; 2,000 shares authorized; 2,000 shares outstanding 2 2 Owner's net investment 6,851 13,877 -------- -------- Total owner's net investment 6,853 13,879 -------- -------- Total liabilities and owner's investment $ 23,743 $ 26,886 ======== ========
See accompanying notes. 2 SPECTRUM HEALTHCARE RESOURCES COMBINED STATEMENTS OF OPERATIONS (In Thousands)
YEAR ENDED SEPTEMBER 30, 2001 2000 1999 ---------- ---------- ---------- Revenues $ 145,768 $ 116,662 $ 75,732 Costs and expenses: Costs of services provided 120,416 98,919 66,903 Salaries and related costs 6,397 5,405 3,191 Depreciation and amortization 296 294 377 ---------- ---------- ---------- 127,109 104,618 70,471 ---------- ---------- ---------- Operating income before holding company operating expense allocation 18,659 12,044 5,261 Holding company operating expense allocation 350 444 434 Holding company depreciation and amortization allocation 115 86 241 ---------- ---------- ---------- Operating income 18,194 11,514 4,586 Interest income 49 196 91 Interest expense (1,223) -- (243) ---------- ---------- ---------- Income from operations before income taxes 17,020 11,710 4,434 Provision for income taxes 6,520 4,484 1,742 ---------- ---------- ---------- Net income $ 10,500 $ 7,226 $ 2,692 ========== ========== ==========
See accompanying notes. 3 SPECTRUM HEALTHCARE RESOURCES COMBINED STATEMENTS OF CHANGES IN OWNER'S NET INVESTMENT (In Thousands) Balance at September 30, 1998 $ 3,292 Net income 2,692 Net transfer from owner 2,421 -------- Balance at September 30, 1999 8,405 Net income 7,226 Net transfer to owner (1,752) -------- Balance at September 30, 2000 13,879 Net income 10,500 Net transfer to owner (17,526) -------- Balance at September 30, 2001 $ 6,853 ========
See accompanying notes. 4 SPECTRUM HEALTHCARE RESOURCES COMBINED STATEMENTS OF CASH FLOWS (In Thousands)
YEAR ENDED SEPTEMBER 30, 2001 2000 1999 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 10,500 $ 7,226 $ 2,692 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 411 380 618 Deferred income taxes (128) (395) (50) Provision for doubtful accounts 175 1,385 898 Changes in operating assets and liabilities: Receivables 3,913 (9,012) (6,627) Prepayments and other current assets (499) 44 1 Other assets (334) -- (36) Accounts payable and accrued expenses 3,163 2,391 (157) Other operating activities 720 155 713 -------- -------- -------- Net cash provided by operating activities 17,921 2,174 (1,948) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant, and equipment (395) (422) (473) -------- -------- -------- Net cash used in investing activities (395) (422) (473) CASH FLOWS FROM FINANCING ACTIVITIES Net cash remitted to owner (17,526) (1,752) 2,421 -------- -------- -------- Net cash used in financing activities (17,526) (1,752) 2,421 -------- -------- -------- Increase in cash and cash equivalents -- -- -- Cash and cash equivalents at beginning of year -- -- -- -------- -------- -------- Cash and cash equivalents at end of year $ -- $ -- $ -- ======== ======== ========
See accompanying notes. 5 SPECTRUM HEALTHCARE RESOURCES NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION Spectrum Healthcare Resources (the Company) is comprised of the combined operations of Spectrum Healthcare Resources of Delaware, Inc. (SHRD) and Spectrum Primary Care of Delaware, Inc. (SPCD), together with their wholly owned subsidiaries. The Company provides health care management services to military treatment facilities for beneficiaries of U.S. military personnel through TRICARE. Services are generally provided utilizing independent physician contractors, employed paraprofessionals, and support staff. SHRD and SPCD are both wholly owned subsidiaries of Spectrum Healthcare Services, Inc. (SHS). 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND COMBINATION All majority-owned subsidiaries of SHRD and SPCD are consolidated, and all intercompany accounts and transactions are eliminated. The accounts of SHRD and SPCD have been combined for reporting purposes, and all intercompany accounts and transactions are eliminated. USE OF ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates affecting these financial statements are the accrual estimates for employee health care claims payable, workers' compensation, and professional liability claims (see Note 5). Actual results could differ from these estimates. CASH SHS principally utilizes a centralized cash management system. Under this system, the Company's cash requirements are provided directly by SHS; similarly, cash generated by the Company is remitted directly to SHS. All charges and allocation of costs for functions and services provided by SHS are deemed paid by the Company, in cash, in the period in which the cost is recorded in the combined financial statements. Intercompany balances with SHS and its affiliates, net of cash, are included in owner's net investment. 6 SPECTRUM HEALTHCARE RESOURCES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of trade receivables and accounts payable. At September 30, 2001 and 2000, the book values of trade receivables and accounts payable approximate their fair value. DEBT MANAGEMENT In November 2000, SHS amended and restated its loan agreement with its bank group. The amended and restated agreement provides a $110 million credit facility consisting of a $50 million five-year term loan and a $60 million five-year revolving credit line. SHS borrowings under this credit facility were approximately $60 million at September 30, 2001. The loan agreement contains various covenants which, among other things, require the maintenance of interest and fixed charge coverages, a maximum total debt leverage ratio, a minimum EBITDA level, and limitations on capital expenditures, investments, indebtedness, liens, and sales of assets. Amounts due under the loan agreement are guaranteed by the principal subsidiaries of SHS, including the Company, and are secured by essentially all of the assets of SHS and its subsidiaries, including the Company. In December 2000, SHS issued $24.0 million of junior subordinated notes payable on which interest accrues at a rate of 10 percent per annum with payment due upon maturity in December 2006. No long-term debt or payable under junior subordinated notes has been pushed down to the Company. However, interest under all borrowings and junior subordinated notes payable is allocated to the subsidiaries of SHS, including the Company, and has been included in the statements of operations. SHS has entered into an interest rate swap under which the variable interest rate on $20 million of borrowings under the credit facility is swapped to a fixed interest rate of 7.8 percent. In addition, SHS purchased an interest cap under which the variable interest rate on $15 million of borrowings under the credit facility is capped at 9 percent. Allocated interest charges included the effect of marking the interest rate swap and interest rate cap to market. REVENUE AND COST RECOGNITION The Company engages principally in hourly rate contracts as a subcontractor to the prime contractor holding a contract with the government. Revenues earned under hourly contracts (84 percent, 80 percent, and 67 percent of revenue in 2001, 2000, and 1999, respectively) with prime contractors are recognized in the period that services are rendered. Costs of services provided include the compensation of physicians, paraprofessionals, nurses, and other health care personnel, including any related benefits. The costs of services provided are recognized in the period in which they are provided based primarily on hours worked. Other contractual arrangements include fee-for-service contracts (16 percent, 20 percent, and 33 percent of revenue in 2001, 2000, and 1999, respectively) where the Company bills and 7 SPECTRUM HEALTHCARE RESOURCES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) collects the charges for medical services provided by its contracted health care professionals and assumes risk related to patient volume, reimbursement rates, and collections. INCOME TAXES The Company's results have been included in consolidated returns filed with federal and various state jurisdictions in which the Company operates. In state jurisdictions that do not allow consolidated returns, separate returns have been filed. The provision for income taxes, the related assets and liabilities, and the related note disclosures are presented as if the Company had filed separate tax returns. The Company accounts for income taxes using the liability method, whereby deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the financial reporting basis and tax basis of assets and liabilities using enacted tax rates. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated over the estimated useful lives on a straight-line basis. Gains and losses on dispositions are included in operating results. Maintenance and repairs are charged to operations currently, and replacements and significant improvements are capitalized. The estimated useful lives for the major categories of property and equipment are 10 to 30 years for buildings and improvements and 3 to 10 years for furniture, equipment, and fixtures. Leasehold improvements are amortized over the useful life or the remaining term of the lease, whichever is shorter. Depreciation expense in fiscal years 2001, 2000, and 1999 was $300,000, $299,000, and $558,000, respectively. STOCK-BASED COMPENSATION Certain employees of the Company participate in the SHS Stock Option Plan. SHS accounts for its stock-based compensation plans for employees using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost has been charged to earnings for options granted, as the number of shares was fixed and the option price equaled or exceeded the market price on the date of grant for all options. The pro forma disclosures under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, have not been made, as this information is not relevant to the operating results of the Company. RECLASSIFICATIONS Certain reclassifications have been made to the 2000 combined financial statements to conform to the current year presentation. 8 SPECTRUM HEALTHCARE RESOURCES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. MAJOR CUSTOMER CONCENTRATIONS The Company operates as a subcontractor to the prime contractor that holds contracts with the government. Following are the primary prime contractors with which the Company has subcontracts and the percent of current fiscal year revenue and accounts receivable under each respective contract.
2001 2000 1999 --------------------- -------------------- ------- ACCOUNTS ACCOUNTS REVENUE RECEIVABLE REVENUE RECEIVABLE REVENUE --------------------- -------------------- ------- HealthNet 58.6% 49.7% 58.0% 57.7% 60.6% Humana Military Healthcare Services (previously Anthem Alliance) 29.7% 34.9% 26.0% 30.2% 21.6% TriWest Healthcare Alliance 11.7% 13.7% 12.5% 7.2% 16.7%
4. INCOME TAXES The provision for income taxes consists of:
2001 2000 1999 ------- ------- ------- (In Thousands) Current: Federal $ 5,623 $ 4,127 $ 1,516 State and local 1,025 752 276 ------- ------- ------- 6,648 4,879 1,792 Deferred: Federal (108) (335) (42) State and local (20) (60) (8) ------- ------- ------- (128) (395) (50) ------- ------- ------- $ 6,520 $ 4,484 $ 1,742 ======= ======= =======
9 SPECTRUM HEALTHCARE RESOURCES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The provision for income taxes varies from the amount determined by applying the U.S. federal statutory rate to income before income taxes as a result of the following:
2001 2000 1999 ---- ---- ---- (Percent of Pretax Income) U.S. statutory income tax rate 35.0% 35.0% 35.0% Increase in taxes, resulting from state income taxes, net of federal tax benefit 4.0% 4.0% 4.0% Permanent book/tax differences (0.7%) (0.7%) 0.3% ---- ---- ---- Effective income tax rate 38.3% 38.3% 39.3% ==== ==== ====
As of September 30, the components of the net deferred tax asset are as follows:
2001 2000 ------ ------ (In Thousands) Accruals and receivable allowances $1,625 $1,831 Accrual for professional liability claims 709 440 Property and equipment 163 89 Deferred compensation 490 465 Other 25 59 ------ ------ $3,012 $2,884 ====== ======
5. PROFESSIONAL LIABILITY INSURANCE The Company maintains professional liability (medical malpractice) insurance in amounts that it considers appropriate based upon the nature of its business and past claims experience. This coverage is for all health care employees and is offered to the Company's independently contracted physicians. The Company's professional liability program involves occurrence-based insurance, claims-made insurance, self-insured retention and accruals for tail malpractice liabilities. The amount of uninsured liabilities is based on management's evaluation, arrived at after consultation with independent actuaries. The ultimate amount of such liabilities may differ from the amount provided, and any resulting change in estimate will be reflected in the period in which such change becomes apparent. Professional liability insurance expense was $444,000, $631,000, and $597,000 in the fiscal years 2001, 2000, and 1999, respectively. During fiscal year 2001, one of the Company's primary insurance carriers for certain historical years was placed into receivership by the state in which it is organized. Management believes that any potential exposure for malpractice claims in those years will not have a material adverse impact on the Company's financial statements. 10 SPECTRUM HEALTHCARE RESOURCES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. CAPITAL STOCK The Company has 2,000 authorized shares, par value $1.00, common stock, of which 2,000 shares are issued and outstanding at September 30, 2001 and 2000. No change in the number of authorized or issued shares occurred during the two years ended September 30, 2001. 7. RELATED-PARTY TRANSACTIONS SHS provides certain holding company services to the Company, including corporate and group management, certain legal services, and other indirect administrative functions. The holding company operating expenses allocated to the Company included in these combined financial statements were $350,000, $444,000, and $434,000 for the fiscal years 2001, 2000, and 1999, respectively. The methodology utilized to allocate the holding company's operating expenses to the Company was based on specific identification of expenses incurred on behalf of the Company, with all other expenses allocated based on the percentage of the Company's revenue to total SHS revenue. The Company utilizes various overhead services provided by other SHS affiliates, including tax, treasury, executive management support, administrative services, and information technology services. The charges allocated to the Company for these services represent both allocations of common costs and specifically identified expenses that are incurred on behalf of the Company by other SHS affiliates. The amounts charged to the Company for these services may not necessarily be representative of the costs that would be incurred by the Company on a stand-alone basis. Costs charged for these services are reflected within cost of services provided in the accompanying combined statements of operations and totaled $948,000, $851,000, and $1,822,000 for the years ended September 30, 2001, 2000, and 1999, respectively. 8. LEASES SHS leases office space which the Company occupies and for which the Company is jointly and severally liable. The Company receives an allocation of lease costs from SHS based on head count. The Company leases certain other office space, fax machines, and medical and computer equipment under noncancelable operating leases with terms ranging from one year to eight years. Rental expense was approximately $1.2 million for fiscal years 2001, 2000, and 1999. 11 SPECTRUM HEALTHCARE RESOURCES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The Company's share of future minimum rental commitments under all noncancelable operating leases as of September 30, 2001 is as follows:
(In Thousands) 2002 $ 972 2003 407 2004 94 2005 77 2006 and thereafter 58 ------ Total minimum rental obligations $1,608 ======
9. EMPLOYEE PROFIT SHARING PLANS SHS provides an employee savings plan in which the Company's employees participate that permits employees to make contributions in accordance with Internal Revenue Code Section 401(k). Employees who meet age and service requirements are eligible to participate by contributing up to 21 percent of their pretax compensation. SHS provides a discretionary match based upon the employee's status and SHS's operating results. For those individuals who are considered highly compensated, SHS provides a non-qualified deferred compensation plan in which certain of the Company's employees participate. Employees are allowed to contribute up to 21 percent of their compensation, with SHS providing a discretionary match each year based on SHS's operating results. Total expense recognized by the Company under these plans was $349,000, $248,000, and $136,000 in fiscal years 2001, 2000, and 1999, respectively. 10. SUBSEQUENT EVENTS On November 30, 2001, SHS effected a separation of its military (the Company) and correctional health care businesses. The separation was accomplished through the exchange of the common stock of Spectrum Healthcare of Delaware, Inc. (Spectrum Delaware), which owns the correctional health care business, for the junior subordinated notes of SHS and subsequent contribution of the Spectrum Delaware stock to a newly created limited liability corporation, Spectrum Holdings of Delaware LLC (the LLC), in exchange for preferred units in the LLC. The common stock of SHS was also contributed by shareholders to the LLC in exchange for common units in the LLC. As a result of the transaction, SHS, which owns the Company, and Spectrum Delaware are directly owned by the LLC. The former shareholders and junior subordinated noteholders of SHS are now the common and preferred unitholders, respectively, of the LLC. Spectrum Healthcare, Inc., the borrower under the bank Loan Agreement, remains a subsidiary of SHS and will provide funding to Spectrum Delaware as needed. Spectrum Delaware and its subsidiaries, along with the Company, continue to guarantee the Loan Agreement and have pledged substantially all of their assets with respect thereto. SHS, Spectrum Delaware, and their subsidiaries will provide services to each other, on an arm's-length basis, under a services 12 SPECTRUM HEALTHCARE RESOURCES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) agreement. In addition, Spectrum Delaware owes SHS approximately $25 million under a promissory note created to reflect an allocation of debt prior to the separation. On March 29, 2002, SHS and Team Health, Inc. entered into a definitive agreement whereby Team Health, Inc. would purchase all of the issued and outstanding shares of the SHS common stock, par value $0.01 per share, for approximately $147 million, as adjusted for certain settlements. All existing outstanding debt of SHS will be retired. The acquisition will be financed through a combination of existing cash and a new financing commitment arranged by Bank of America, N.A. and Fleet National Bank. In conjunction with this acquisition, Team Health, Inc. will also gain control of the Company. Certain shareholders of the Company are also shareholders of Team Health, Inc. The agreement is expected to be finalized on April 30, 2002. 13 SPECTRUM HEALTHCARE RESOURCES COMBINED BALANCE SHEET (UNAUDITED) (In Thousands, Except Share and per Share Data)
MARCH 31, 2002 -------------- ASSETS Current assets: Trade receivables, net $23,320 Inventories and other current assets 529 Deferred income taxes 1,949 -------------- Total current assets 25,798 Property and equipment, net 462 Deferred income taxes 1,014 Other 1,739 -------------- Total assets $29,013 ============== LIABILITIES AND OWNER'S INVESTMENT Current liabilities: Accounts payable $ 191 Accrued payroll and related expenses 4,728 Accrued insurance 1,555 Other accrued expenses 9,980 -------------- Total current liabilities 16,454 Professional liability claim reserves 1,059 Other noncurrent liabilities 2,116 -------------- Total noncurrent liabilities 3,175 Owner's net investment: Common stock, par value $1.00 per share; 2,000 shares authorized; 2,000 shares outstanding 2 Owner's net investment 9,382 -------------- Total owner's net investment 9,384 -------------- Total liabilities and owner's investment $29,013 ==============
See accompanying notes. 14 SPECTRUM HEALTHCARE RESOURCES COMBINED STATEMENTS OF OPERATIONS (UNAUDITED) (In Thousands)
SIX MONTHS ENDED MARCH 31, 2002 2001 -------- -------- Revenues $ 83,099 $ 70,175 Costs and expenses: Costs of services provided 69,177 57,232 Salaries and related costs 3,437 3,839 Depreciation and amortization 190 149 -------- -------- 72,804 61,220 -------- -------- Operating income before holding company operating expense allocation 10,295 8,955 Holding company operating expense allocation 571 185 Holding company depreciation and amortization allocation 68 56 -------- -------- Operating income 9,656 8,714 Interest income 2 44 Interest expense (509) (404) -------- -------- Income from operations before income taxes 9,149 8,354 Provision for income taxes 3,768 3,223 -------- -------- Net income $ 5,381 $ 5,131 ======== ========
See accompanying notes. 15 SPECTRUM HEALTHCARE RESOURCES COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (In Thousands)
SIX MONTHS ENDED MARCH 31, 2002 2001 ------ ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,157 12,145 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant, and equipment (307) (175) ------ ------- Net cash used in investing activities (307) (175) CASH FLOWS FROM FINANCING ACTIVITIES Net cash remitted to owner (2,850) (11,970) ------ ------- Net cash used in financing activities (2,850) (11,970) Increase in cash and cash equivalents -- -- Cash and cash equivalents at beginning of period -- -- ------ ------- Cash and cash equivalents at end of period $ -- $ -- ====== =======
See accompanying notes. 16 SPECTRUM HEALTHCARE RESOURCES NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2002 1. BASIS OF PRESENTATION Spectrum Healthcare Resources (the "Company") is comprised of the combined operations of Spectrum Healthcare Resources of Delaware, Inc. (SHRD) and Spectrum Primary Care of Delaware, Inc. (SPCD), together with their wholly owned subsidiaries. The Company provides health care management services to military treatment facilities for beneficiaries of U.S. military personnel through TRICARE. Services are generally provided utilizing independent physician contractors, employed paraprofessionals, and support staff. SHRD and SPCD are both wholly owned subsidiaries of Spectrum Healthcare Services, Inc. (SHS). The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements and footnote disclosures should be read in conjunction with the September 30, 2001 audited combined financial statements and the notes thereto. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates. 2. RECAPITALIZATION OF SHS On November 30, 2001, SHS effected a separation of its military (the Company) and correctional health care businesses. The separation was accomplished through the exchange of the common stock of Spectrum Healthcare of Delaware, Inc. (Spectrum Delaware), which owns the correctional health care business, for the junior subordinated notes of SHS and subsequent contribution of the Spectrum Delaware stock to a newly created limited liability corporation, Spectrum Holdings of Delaware LLC (the LLC), in exchange for preferred units in the LLC. The common stock of SHS was also contributed by shareholders to the LLC in exchange for common units in the LLC. As a result of the transaction, SHS, which owns the Company, and Spectrum Delaware are directly owned by the LLC. The former shareholders and junior subordinated noteholders of SHS are now the common and preferred unitholders, respectively, of the LLC. Spectrum Healthcare, Inc., the borrower under the bank Loan Agreement, remains a subsidiary of SHS and will provide funding to Spectrum Delaware as needed. Spectrum Delaware and its subsidiaries, along with the Company, continue to guarantee the Loan Agreement and have pledged substantially all of their assets with respect thereto. SHS, Spectrum Delaware, and their 17 SPECTRUM HEALTHCARE RESOURCES NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED subsidiaries will provide services to each other, on an arm's-length basis, under a services agreement. In addition, Spectrum Delaware owes SHS approximately $25 million under a promissory note created to reflect an allocation of debt prior to the separation. 3. PROFESSIONAL LIABILITY INSURANCE The Company maintains professional liability (medical malpractice) insurance in amounts that it considers appropriate based upon the nature of its business and past claims experience. This coverage is for all health care employees and is offered to the Company's independently contracted physicians. The Company's professional liability program involves occurrence-based insurance, claims-made insurance, self-insured retention and accruals for tail malpractice liabilities. The amount of uninsured liabilities is based on management's evaluation, arrived at after consultation with independent actuaries. The ultimate amount of such liabilities may differ from the amount provided, and any resulting change in estimate will be reflected in the period in which such change becomes apparent. During fiscal year 2001, one of the Company's primary insurance carriers for certain historical years was placed into receivership by the state in which it is organized. Management believes that any potential exposure for malpractice claims in those years will not have a material adverse impact on the Company's financial statements. 4. SUBSEQUENT EVENT On March 29, 2002, SHS and Team Health, Inc. (Team Health) entered into a definitive agreement whereby Team Health agreed to purchase all of the issued and outstanding SHS common stock, par value $0.01 per share, and fund the repayment of all SHS outstanding debt for approximately $147 million. The acquisition of SHS by Team Health was completed on May 1, 2002. The $147 million purchase price will be subject to adjustment during the 90-day period subsequent to April 30, 2002 for actual working capital at April 30, 2002. 18 TEAM HEALTH, INC. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) On May 1, 2002, Team Health acquired Spectrum Healthcare Resources ("SHR") and refinanced its senior bank credit facilities. The following unaudited pro forma condensed consolidated balance sheet as of March 31, 2002 gives effect to the acquisition of SHR by Team Health and the refinancing of Team Health's senior bank credit facilities as if the transactions had been completed as of March 31, 2002. The following unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2001, and the three months ended March 31, 2002, give effect to the acquisition of SHR by Team Health and the refinancing of Team Health's senior bank credit facilities as if the transactions had been completed at the beginning of the periods presented. The pro forma condensed consolidated financial information presented herein does not purport to represent what Team Health's results of operations or financial position would have been had such transaction, in fact, occurred at the beginning of the periods presented or to project Team Health's results of operations for any future period. The pro forma results of operations are not necessarily indicative of the results that may be expected from such acquisition. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Team Health, included in its Annual Report on Form 10-K for the year ended December 31, 2001, the unaudited condensed consolidated financial statements of Team Health, included in its Quarterly Report on Form 10-Q for the period ended March 31, 2002, and the financial statements of SHR, included elsewhere in this Current Report on Form 8-K/A. Certain reclassifications have been made in SHR's historical financial statements included in the pro forma financial statements to conform to Team Health's presentation. 19 PRO FORMA FINANCIAL STATEMENTS BALANCE SHEET MARCH 31, 2002
Pro Forma Historical Pro Forma Financial Team Health SHR Total Adjustments Statements ----------- ------- -------- ----------- ---------- ASSETS Current assets: Cash and cash equivalents $52,943 $- $52,943 $225,000 (a) $13,971 (110,862) (b) (5,082) (c) (148,028) (d) Accounts receivable, net 128,721 23,320 152,041 152,041 Prepaid expenses and other current assets 6,175 529 6,704 6,704 Income tax receivable 567 - 567 567 -------- ------- -------- -------- -------- Total current assets 188,406 23,849 212,255 (38,972) 173,283 Property and equipment, net 18,968 462 19,430 19,430 Intangibles, net 22,678 - 22,678 12,950 (d) 35,628 Goodwill 33,346 - 33,346 122,134 (d) 155,480 Deferred income taxes 75,386 1,014 76,400 76,400 Other 16,011 1,739 17,750 1,712 (c) 21,794 2,332 (d) -------- ------- -------- -------- -------- $354,795 $27,064 $381,859 $100,156 $482,015 ======== ======= ======== ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $11,824 $191 $12,015 $ $12,015 Accrued compensation and physician payable 47,796 4,728 52,524 52,524 Other accrued liabilities 7,401 9,203 16,604 (1,228) (d) 15,376 Income taxes payable 1,622 2,332 3,954 (1,348) (c) 2,606 Current maturities of long-term debt 20,462 - 20,462 8,250 (a) 8,250 (20,462) (b) Deferred income taxes 3,673 (1,949) 1,724 1,724 -------- ------- -------- -------- -------- Total current liabilities 92,778 14,505 107,283 (14,788) 92,495 Long-term debt, less current maturities 190,400 - 190,400 216,750 (a) 316,750 (90,400) (b) Other non-current liabilities 35,165 3,175 38,340 38,340 Mandatory redeemable preferred stock 134,004 - 134,004 134,004 Commitments and Contingencies Common stock 100 2 102 (2) (d) 100 Additional paid in capital 49 - 49 49 Retained earnings (deficit) (97,701) 9,382 (88,319) (2,022) (c) (99,723) (9,382) (d) -------- ------- -------- -------- -------- $354,795 $27,064 $381,859 $100,156 $482,015 ======== ======= ======== ======== ========
20 PRO FORMA FINANCIAL STATEMENTS STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002
Historical Financial Statements Pro Forma --------------------------------- Pro Forma Financial Team Health SHR Total Adjustments Statements (1) ----------- --- ----- ----------- -------------- Net revenue $263,727 $ 42,672 $306,399 $ $306,399 Provision for uncollectibles 90,817 166 90,983 90,983 -------- -------- -------- -------- -------- Net revenue less provision for uncollectibles 172,910 42,506 215,416 215,416 Professional expenses 137,527 35,328 172,855 172,855 -------- -------- -------- -------- -------- Gross profit 35,383 7,178 42,561 42,561 General and administrative expenses 17,187 2,184 19,371 19,371 Management fee and other expenses 138 -- 138 138 Depreciation and amortization 3,568 134 3,702 1,943(g) 5,645 Interest expense, net 5,276 210 5,486 974(e) 6,609 149(f) -------- -------- -------- -------- -------- Earnings before income taxes and cumulative effect of change in accounting principle 9,214 4,650 13,864 (3,066) 10,798 Income tax expense 3,824 1,910 5,734 (449)(h) 5,285 -------- -------- -------- -------- -------- Earnings before cumulative effect of change in accounting principle 5,390 2,740 8,130 (2,617) 5,513 Dividends on preferred stock 3,225 -- 3,225 3,225 -------- -------- -------- -------- -------- Net earnings before cumulative effect of change in accounting principle available to common stockholders $ 2,165 $ 2,740 $ 4,905 $ (2,617) $ 2,288 ======== ======== ======== ======== ========
1 These pro forma financial results exclude the effect of writing-off $3.4 million of deferred financing costs related to the Company's senior bank credit facilities that were refinanced with new senior bank credit facilities. The write-off of such costs would be presented as an extraordinary loss of $2.0 million, net of taxes of $1.4 million. 21 PRO FORMA FINANCIAL STATEMENTS STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001
Historical Financial Statements Pro Forma --------------------------------- Pro Forma Financial Team Health SHR (2) Total Adjustments Statements (1) ----------- ------- ----- ----------- -------------- Net revenue $ 965,285 $146,273 $1,111,558 $ $ 1,111,558 Provision for uncollectibles 336,218 505 336,723 336,723 ---------- -------- --------- --------- ------------ Net revenue less provision for uncollectibles 629,067 145,768 774,835 774,835 Professional expenses 523,154 120,416 643,570 643,570 ---------- -------- --------- --------- ------------ Gross profit 105,913 25,352 131,265 131,265 General and administrative expenses 63,998 6,747 70,745 70,745 Management fee and other expenses 649 - 649 649 Impairment of intangibles 4,137 - 4,137 4,137 Depreciation and amortization 14,978 411 15,389 13,877(g) 29,266 Interest expense, net 22,739 1,174 23,913 776(e) 26,199 1,510(f) ---------- -------- --------- --------- ------------ Earnings (loss) before income taxes and extraordinary item (588) 17,020 16,432 (16,163) 269 Income tax expense 871 6,520 7,391 (914)(h) 6,477 ---------- -------- --------- --------- ------------ Net earnings (loss) before extraordinary item (1,459) 10,500 9,041 (15,249) (6,208) Dividends on preferred stock 11,889 - 11,889 11,889 ---------- -------- --------- --------- ------------ Net earnings (loss) before extraordinary item available to common stockholders $ (13,348) $ 10,500 $ (2,848) $ (15,249) $ (18,097) ========== ======== ========= ========= ============
1 These pro forma financial results exclude the effect of writing-off $3.4 million of deferred financing costs related to the Company's senior bank credit facilities that were refinanced with new senior bank credit facilities. The write-off of such costs would be presented as an extraordinary loss of $2.0 million, net of taxes of $1.4 million. 2 The SHR historical financial statements are for the twelve months ended September 30, 2001. 22 7 PRO FORMA FINANCIAL STATEMENTS PRO FORMA ADJUSTMENTS Adjustment Description (a) To reflect the borrowing of $225.0 million to finance the acquisition of SHR and retire existing Team Health debt. (b) To reflect the repayment of $110.9 million of existing Team Health debt. (c) To reflect the cost of new deferred financing costs and the write-off of previously deferred financing costs as follows: New deferred financing costs $5,082 Write-off of previously deferred financing costs (3,370) ------ Change in other assets $1,712 ======
The pro forma adjustment to retained earnings and income taxes payable reflects the effect of writing-off previously deferred financing costs of $3,370, net of related income tax effect of $1,348 (d) To reflect the consideration rendered for the acquisition of SHR and to reflect purchase price allocation adjustments to reflect assets acquired and liabilities at their estimated fair values: Consideration rendered: Purchase of stock $ 77,927 Repayment of assumed debt 62,150 Purchase from a third party of a note receivable due from the parent of SHR 6,951 Estimated acquisition costs 1,000 -------- Total estimated consideration $148,028 ======== Purchase price related pro forma adjustments: Adjustments to reflect assets acquired at fair value: Intangibles $ 12,950 Goodwill 122,134 Note receivable 6,951 Other assets 2,332 $144,367 -------- Adjustments to reflect liabilities assumed at fair value: Note payable (6,951) Other accrued liabilities 1,228 (5,723) -------- Pro forma adjustments to eliminate SHR's historical equity: Common stock 2 Retained earnings 9,382 9,384 -------- -------- $148,028 ========
(e) To reflect the exclusion of Team Health and SHR's historical interest expense related to the debt that was repaid, and the inclusion of Team Health's pro forma interest expense related to the debt used to finance the SHR acquisition and retire outstanding Team Health debt. (f) To reflect the estimated pro forma effect of Team Health interest income previously earned on the $39.9 million of cash used for the acquisition of SHR. 23 (g) To reflect the elimination of SHR's historical depreciation and amortization expense, and the inclusion of Team Health's estimated depreciation of property and equipment and amortization of intangible assets, including goodwill in 2001. (h) To reflect the elimination of SHR's historical income taxes and the inclusion of pro forma income taxes applied to adjusted pro forma pre-tax earnings. 24 -----END PRIVACY-ENHANCED MESSAGE-----